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Variance and Governance

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Strengthening investor confidence

by Bill Miller and Kyle Vrieze

The ultimate financial impact of the natural catastrophe events of 2017, most notably Hurricane Irma, is proving to be very difficult to estimate; both for the major modeling firms in the immediate aftermath of the events, as well as for the insurers adjusting claims in the weeks and months following. The accumulated industry loss report for Irma through Property Claim Services, or PCS, initially dropped from the first to the second report, and then steadily rose in each successive report.

There were a number of complicating factors related to Irma. Claims adjusters were already busy with Hurricane Harvey losses when Irma struck. The insurance claims environment in Florida was complex before Irma, and the storms’ impact has brought that complexity more sharply into focus; much to the consternation of insurers, reinsurers, insurance-linked securities (ILS) fund managers, and investors who have seen the value of the capital they’ve committed to the risk dwindle with each upward revision in the losses.

The Value of Independence

The evolution of the impact of the 2017 events has caused some investors to become concerned.  Significant late adjustments to storm liabilities can undermine investor confidence, which is so critical for ILS fund managers and reinsurers to maintain.

This is why reinsurers and ILS fund managers can benefit from an independent partner in the liability estimation process. Property cat reinsurers typically commission independent actuarial reserve reviews. One of the key values they realize through this service is the independent third-party view and the industry expertise they can access through their partner firm. Some ILS funds engage independent experts for that same reason.

ILS fund managers can maintain and strengthen investor confidence by making an investment in a more robust event loss-estimation process using an independent partner. Audit firms, also, may find greater comfort in having a third-party expert provide a second independent view of these loss estimates. Over time, fund managers can differentiate themselves by their increasing speed and accuracy in the estimation process.

Ultimately, Investors Will Decide

Along with investing in the event loss-estimation process as a strategic opportunity, funds must respond to the changing regulatory landscape to maintain investor confidence. The industry must manage an overlap of fund regulation with insurance regulation, which requires a unique combination of fund expertise with reinsurance expertise. Regulators may implement enhanced reporting requirements, responding to both lessons learned and market growth over the past few years.

Attracting more capital will see ILS managers focus on effectively deploying it on behalf of their investors. As this asset class matures, with difficult-to-value events, investors will likely demand more independence in the valuation process. Time will certainly tell.

Bill Miller is a Managing Director and leads the Actuarial and Financial Risk team, and Kyle Vrieze is a Director and P&C Actuary at KPMG in Bermuda.

This article was originally published in the February 2019 edition of the RG Business Magazine.

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